Five Best Tax Saving And Smart Planning Tips For Small Business Owners

No,  this is not another blog about lame tax ideas.   Big Business has many tips that are not known by most CPAs.   The best five tax planning tips are:
1.  Use more than one entity.  Have one use the accrual basis of account.   This allows you to avoid taxes on prepayments  (more on this link) and expense costs before they are paid.   Have one entity be a corporation.    Corporations can be taxed as a separate entity (which means they pay their own taxes) or a pass through (by election subChapter S of the tax code).

Each of these corporate taxation methods has a unique advantage.   For a start-up, the separate entity has the benefit of allowing you be late on paying income tax on the profits.  Thus, you have more money to invest in growth.

Have one corporation doing business in a tax-free state such as Nevada.

2.  If you have only part-time employees or no employees fund your business  with the little-known tax savings of a solo 401K plan  (more on this link).  This works only if you have no full-time employees.  Big businesses use the ESOP retirement plan.  It is a fantastic tool but most small business can not afford the annual compliance cost.

3.  If you make sales via your website, place your website on a server in a tax-free state (learn more here) Also, have the server and website owned by a corporation in the same state.  If your website sells a service or another intangible item, use a tax haven corporation to own the site.  The server needs to be in the same country as the corporation.

4.  Use an irrevocable non-grantor trust to own any passthrough entities.   Of course, have the trust in a tax-free state such as  Nevada.   A non-grantor trust has almost no audit risks.  This type of a trust files its own tax return (Form 1041) and pay its own taxes.  By moving income to this return, you have a lower “adjusted gross income.”

A lower adjusted gross income allows you larger itemized deductions and more tax credits.  It also reduces your chances of a tax audit.

5.  Don’t rely upon year-end planning.  It is a suckers move.  Usually, you end up spending money to be able for a deduction.  Big Business plans a year in advance and not a month before year end.  Each time they add a product or service, they think about tax planning.   The most effective tax planning looks at income and not expenses.

If you need help creating a strategic tax plan, then contact me, Brian Dooley, CPA, MBT at 949-939-3414.  A recent Government study showed that tax planning businesses are taxed at 14%.  For every one dollar spent in tax planning,  ten dollars are saved in taxes.

 

 

U.S. Pre-Immigration International Tax Planning with Trusts

The Wealthy have used trusts to avoid taxes for almost one thousand years.  Trusts started in the United Kingdom during the Great Crusades.   Over the last ten centuries, trust law has evolved.    In the U.S., each state has its own set of trust laws.   Every trust is uniquely drafted to fit the needs of you and your family.

The most popular types in America are:
Revocable Trusts
Irrevocable Trust
Spendthrift Trust Irrevocable Trusts
Spendthrift Trust  Asset Protection Irrevocable Trust
Charitable Trust
Constructive Trust- usually not planned
Special Needs Trust for disabled family members
Tax By-Pass Trust (used by Americans only)

The Best Pre-Immigration International Tax Strategy is a Trust

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How the IRS Taxes Australian, Candadian, U.K. and Europeans Companies and Citizens Doing Business In The United States

french tax, french tax planning, job loss.

French businesses are profiting by avoiding the VAT by manufacturing in the U.S.

This blog is for Australian, Canadain, U.K. and Western European companies and citizens planning to have a business in the U.S. or business income from U.S. customers.

The United States is courting U.K., Western European, Canadian and Australian citizens to move their businesses.  The U.S. doesn’t  have a VAT (value-added tax).  The absence of this tax gives a 25% increase in a company’s purchasing power (assuming a VAT of 20%) of inventory, machinery and employees.  Business makes more money due to the additional working capital.   

Labor unions are weak in the U.S. Employee rights are limited compared to the U.K., the EU, and Australia.

This blog explains how citizens (and their companies) from a tax treaty country are taxed in the U.S.

I am using the U.S. Model Income Tax Convention (the “U.S. Model Treaty”) for this blog.  I will highlight the articles that apply to business.  I will make the treaty easy to understand by removing the tax jargon. 

If you would like to discuss a U.S.’s tax treaty, then please call me, Brian Dooley, CPA, MBT at (U.S.) 949-939-3414.

 Next, I will explain the U.S. tax law on doing business in USA.  

Lastly, I will have some questions that I am frequently asked and the answer.

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How to Prepare Form 1120F for a Foreign Corporation’s non-U.S. Business Income and Investment Income & Form 5471

Table of Contents to Foreign Corporation Tax Planning and Preparation for Form 1120F.  For Form 5471, please click on this link.

International tax planning has a thin line between non-business income and business income.

A foreign corporation pays a tax of 30 percent of the amount it receives from sources within the United States as investment income and sometimes compensation:1

The 30 percent tax does not apply to interest income on a “portfolio debt”  that a foreign corporation receives from U.S. sources.

Avoiding U.S. tax on Businesses Income with no Permanent Establishment. 

One part of the Form 1120-F to report and pay tax on U.S. source investment income and U.S. source income from the sale of property (including inventory).  When the foreign corporation does not file the U.S. Form 1120F, the IRS can at any time assess taxes.  The corporation will also lose its right to deduct expenses.

If you are not sure if Form 1120F is required, you can use the safe method of a protective filing.   If you need help, then please call me Brian Dooley, CPA, MBT at 949-939-3414.

International tax planning has a thin line between non-business income and business income.

This thin line decides which of two very different tax laws apply.  This blog is on the income that is not connected to a  U.S. office or “place of business”.

Sometimes this income is investment income and sometimes business income that is not connected to a U.S. business’s office or place of business.

A foreign corporation pays a tax of 30 percent of the amount it receives from sources within the United States as:

(1) interest (other than bank interest),  dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and royalties,

(2) gains on the disposal of timber, coal or domestic iron ore with a retained economic interest;

(3) gains from the sale or exchange of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property, or of any interest in such property but only to the extent the gains are from payments that are contingent on the productivity, use, or disposition of the property or interest sold or exchanged.   The taxable portion is after recovery of your cost; and

(4) and other “fixed or determinable” annual or periodical gains, profits, and income (this is a “catch all” part of the tax law that rarely applies).

The gross income (income before expenses) is taxed a 30 percent.  Sometimes, a tax treaty may reduce this tax rate.

The 30 percent tax does not apply to interest income on a “portfolio debt”  that a foreign corporation receives from U.S. sources.

The purpose of the portfolio debt tax law is to allow the foreign investor to make loans to U.S. persons and avoid U.S. taxes.  Yes, the intent of the law is to avoid taxes.  The following is a summary of the type of debts.

(1) An unregistered obligation that is payable only outside the United States if the obligation is designed to be sold only to a non-U.S. person; and

(2) A registered obligation for which a statement is if the beneficial owner of the obligation is not a U.S. person.

The following types of interest cannot be portfolio debt interest:

(1) Contingent interest, such as interest payments that depend upon the income, profits, or assets of the debtor;

(2) Interest received by a bank on an extension of credit made under a loan agreement entered into in the ordinary course of its trade or business;

(3) Interest received by a 10-percent shareholder of the corporation paying the interest; and

(4) Interest received by a controlled foreign corporation from a related person.[1]

The other advantage is U.S. estate taxes.  Upon the death of a non-resident alien, portfolio debt is not included in his or her U.S. estate tax return.

Avoiding U.S. tax on Businesses Income with no Permanent Establishment.

Tax treaty corporations have a unique advantage.   They can earn U.S. business income and not pay U.S. taxes.

Here are some examples of international tax strategies.

Personal service income to U.S. customers

A British law firm has American customers.  They perform the services outside of the U.S.  However; they have an office in Los Angeles for administration and marketing.  Payments made by their American customers are deposited into a U.S. bank located in Los Angeles.

Their income is not subject to U.S. taxes.  You will note that the law firm has a permanent establishment in the U.S.  They did not try to avoid having a permanent establishment or even a place of business.

The tax planning is the international tax law on service income.  This income is sourced where the individual (or computer as in the example below) is located when the services are provided.

Web services to U.S. customers.

A Swiss business has an app that is used by both American businesses and European businesses.  The customer pays for the app pay watching commercials or by monthly subscription services.  The Swiss company maintains and office in Orange County, California for their American owners and directors.  The Swiss company does it banking in Newport Beach, California, and Geneva.

The Swiss businesses income is not subject to U.S. taxes.  Learn why on this link.

Sale of merchandise to Americans   

Sam, a Canadian citizen, has an investor visa and lives in Malibu, and his office is in the Santa Monica.   He owns a U.K. company that sales paddle boards via a U.K. website.  He is a director of the U.K. company.  He is also the sole shareholder.

The paddles are shipped directly from Canada using Federal Express ground shipping.  Title to the paddle board passes to the customer via the website in Canada. The income of the U.K. company is subject to U.S. taxes.   Sam must file form 5471.

FOOTNOTE

[1] Code Section 881(c).